Practice Points Arising from Albertsons’ Claims Against Kroger for Breach of their Merger Agreement

On December 10, 2024, two courts, on antitrust grounds, enjoined the planned $24.6 billion merger pursuant to which Kroger was to acquire Albertsons. After the injunctions were issued, Albertsons terminated the parties' Merger Agreement and filed suit against Kroger in the Delaware Court of Chancery. Albertsons alleges that, post-signing, Kroger had a case of buyer's remorse; and then, to derail the deal, willfully breached its obligations under the Merger Agreement to seek to obtain the antitrust approvals needed to close the deal. Albertsons is seeking the $600 million reverse termination fee (RTF) delineated in the Merger Agreement, as well as all legally available damages (including the lost merger premium). Kroger, in turn, has asserted that Albertsons breached the Merger Agreement and is not entitled to the RTF.

These developments are reminiscent of other busted deal situations, such as the 2017 $54 billion planned merger between Anthem and Cigna, which was enjoined on antitrust grounds. In that case, after trial, the Court of Chancery found that Cigna (the target company) had a post-signing change of heart about the deal and then actively worked against Anthem's regulatory strategy in breach of the merger agreement-but that Cigna owed no damages to Anthem because the merger likely would have been enjoined in any event. In that case, the court determined that, in light of Cigna's breach, it was not entitled to receive the RTF provided for in that transaction.

While some or all of the allegations in the Kroger/Albertsons dispute may or may not be found to be true, they prompt consideration as to how a target company can best protect itself against the possibility that a buyer may not timely and effectively comply with its obligations to pursue the necessary regulatory approvals for a deal.

Key Point

• The typical merger agreement provisions relating to obtaining regulatory approvals may not operate effectively in the case of a buyer who is not fully eager to close. Usually, the typical efforts, cooperation, and termination fee provisions relating to obtaining regulatory approvals are sufficient, as both parties have a unity of interest in the necessary regulatory approvals being obtained so the deal can close. However, where a buyer has a change of heart about the deal post-signing or determines that the divestiture requirements necessary to obtain regulatory clearance are too steep, the typical provisions may not be sufficient to prevent the buyer from subtly sabotaging the regulatory approval process. Thus, under certain circumstances, a target may wish to consider negotiating for additional, less usual agreement provisions to protect against such scenarios. See "Practice Points" below.

Background. In October 2022, Kroger agreed to acquire Albertsons in a merger, subject to antitrust clearance by the Federal Trade Commission. The parties understood from the outset that it could be challenging to obtain antitrust clearance and that, at a minimum, Kroger would have to make significant divestitures of supermarket stores to resolve antitrust issues.

According to Albertsons' Complaint, Kroger proposed to the FTC the divestiture of hundreds of stores, but the FTC found the divestiture package inadequate-stressing the "hodgepodge" nature of the list of stores to be divested and the inexperience and other weaknesses of the proposed divestiture purchaser. After a roughly two-year process, the FTC (joined by eight states) sued in federal court to enjoin the merger; and the States of Washington and Colorado filed separate suits to block the merger in those states. On December 10, 2024, da federal district court in Oregon granted the FTC a preliminary injunction blocking the merger, and a federal court in Washington issued an injunction blocking the merger in that state. Both courts found that the transaction raised antitrust issues and that the proposed divestiture package failed to resolve those issues.

Soon thereafter, Albertsons terminated the Merger Agreement and sued Kroger, asserting that Kroger sought to derail the deal due to strongly negative market and political reactions upon announcement, and decreased grocery store profits as people had shifted to more restaurant (rather than home) eating post-pandemic. Albertsons claims that Kroger willfully breached its contractual efforts obligations to obtain the required regulatory approvals for the merger. Kroger has publicly alleged that Albertsons breached the Merger Agreement, and therefore its termination is invalid and it is not entitled to the RTF; and Kroger separately sent a termination notice to Albertsons.

Discussion

The Merger Agreement

• Efforts obligation. The Merger Agreement sets forth a variety of different efforts standards. First, Kroger and Albertsons each were obligated to use "reasonable best efforts" to take all actions necessary, proper or advisable to satisfy the closing conditions as promptly as reasonably practicable, including by taking actions necessary to eliminate all antitrust impediments. Second, Kroger was required to use "best efforts" to take all actions necessary to eliminate all antitrust impediments to the merger, including by divesting assets, to enable closing to occur as promptly as practicable.
  
  Third, the Merger Agreement had a further provision under which Kroger was obligated, in the event a regulator threatened or instituted any Proceeding (defined to include "any investigation"-which, we note, potentially could include a "Second Request" from the FTC) challenging the merger on antitrust grounds, to take "any and all actions" to (i) contest the Proceeding to avoid the entry of an injunction and (ii) "eliminate each and every impediment under any Antitrust Law" to closing the merger before the end date. Albertsons' Complaint contends that this last provision amounted to a "hell or high water" commitment on the part of Kroger, subject only to the Divestiture Cap. The court, therefore, will have to determine whether this provision imposed an independent "hell or high water" obligation on Kroger beyond the already high "best efforts" obligation, or only obligated Kroger to contest any Proceeding using "best efforts."

• Divestiture Cap. Under the Merger Agreement, Kroger was not obligated to make divestures that would result in the divestiture of more than 650 stores. (Allegedly, Albertsons agreed to sign the Merger Agreement only after the CEO of its largest stockholder obtained the personal assurance of Kroger's CEO that Kroger would divest 650 stores.)
  
  
• Control over the process; obligation to cooperate. Kroger was obligated to "cooperate" with Albertsons in the process; consult with Albertsons before communicating or meeting with regulators; give Albertsons the opportunity to attend and participate in meetings with regulators; and "work together" with Albertsons to resolve disagreements. However, if the parties could not agree after working together in good faith, Kroger had the principal responsibility for devising and implementing the strategy to obtain antitrust approval.
  
  
• Termination fee; damages. If the merger failed to close by a specified end date-and all of the non-antitrust closing conditions (including that Albertsons had materially complied with its obligations under the Merger Agreement) were satisfied-a $600 million termination fee (2.5% of total merger consideration) was payable by Kroger to Albertsons. Further, if Kroger committed any "Willful Breach" of the Merger Agreement, Albertsons could seek, in addition to the termination fee, all legally available damages, including the lost merger premium.

Kroger's alleged willful breach of its efforts obligations

• Inadequate divestiture proposal. Albertsons alleges that the divestiture package Kroger proposed to the FTC (as initially crafted, and as revised over time) was facially inadequate to meet antitrust concerns, and that Kroger knew that it would not pass muster with the FTC. In addition, Albertsons alleges that Kroger did not comply with its best efforts/hell-or-high-water obligation under the Merger Agreement, as the divestiture package did not include 650 stores. According to the Complaint, Kroger's own economic expert admitted that even with the divestiture package Kroger proposed, the merger would still be presumptively anticompetitive in at least 22 geographic markets; and the FTC had stated that this fact was "on its own…sufficient to find that the divestiture will not mitigate the merger's anticompetitive effects…."
  
  
• Non-responsiveness to the FTC. Albertsons alleges that Kroger repeatedly dragged its feet when dealing with the FTC and other regulators, including by not responding to their comments and concerns or even their routine questions, and by doubling down on the divestiture package it proposed to the FTC even in the face of ongoing advice from Albertsons and repeated feedback from the FTC that the package was not sufficient to resolve antitrust concerns.
  
  
• Non-cooperation with Albertsons. Albertsons alleges that Kroger failed to adequately inform and cooperate with Albertsons in the process, including by ignoring Albertsons' advice, not including Albertsons in meetings, and ignoring Albertsons' repeated pleas that Kroger be more responsive to the FTC's concerns.

Albertsons' specific complaints about the proposed divestiture package

• Cherry-picked, nonviable stores. Albertsons alleges that Kroger cherry-picked a "hodge-podge" of stores for divestiture, so that it could retain for itself the most valuable stores and off-load the least valuable stores-rather than selecting stores that, based on objective and neutral economic analysis, would be likely to address antitrust concerns.
  
  
• Number of stores. Albertsons complains that Kroger initially proposed divestiture of only 238 stores, and then increased that number ultimately to 541 stores, which was still short of the 650 stores cap.
  
  
• Unacceptable divestiture purchaser. Albertsons alleges that Kroger waited for months to begin the process of selecting a proposed purchaser of the to-be-divested stores, and then selected among the many interested bidders a company that the regulators were not likely to approve-a grocery wholesaler with little experience operating retail supermarkets, a history of selling retail locations soon after acquiring them, and a need for significant new financing to acquire the stores.
  
  
• Insufficient non-store assets. Albertsons alleges that Kroger did not include in the divestiture package sufficient non-store assets (such as store trade names, private label brands, and technology) for the divested business to thrive as an effective competitor.

The Anthem-Cigna failed merger. Similar to the Kroger-Albertsons situation, in 2017 a federal court, on antitrust grounds, issued a temporary injunction blocking Anthem's acquisition of Cigna. In that case, Anthem (the buyer) then sued Cigna (the target), claiming that Cigna had a post-signing change of heart about the deal and then worked to sabotage the regulatory approval process. Cigna attempted to terminate the merger agreement, and sued Anthem for breach of its obligations under the antitrust covenants in the merger agreement. Cigna sought the $1.85 billion RTF delineated in the agreement, as well as $13 billion in damages. In turn, Anthem sued Cigna for breach of its obligations under the merger agreement, alleging that Cigna had actively worked against Anthem's regulatory strategy (including even providing testimony in court that allegedly supported the FTC's position against the deal). Anthem sought damages of $20 billion. Five years after that deal's announcement, and over a year after the deal was enjoined, the Court of Chancery decided the breach of contract claims. The court held that neither Cigna nor Anthem was liable to the other. The court found that Cigna had breached its obligation to use reasonable best efforts to seek the regulatory approvals, but that Anthem had not been damaged by Cigna's actions because the merger likely would have been enjoined even if Cigna had fulfilled its obligations. The court also found that Anthem had adopted a reasonable regulatory strategy. Importantly, the court also found that Cigna was not entitled to the RTF given its own breaches.

Practice Points

Under certain circumstances, a target may wish to consider negotiating for less usual provisions that could provide additional protection against a remorseful buyer derailing the regulatory approval process. These circumstances might include, for example: a high level of antitrust risk; a buyer with a history of busted deals; a deal that is expected to provoke negative market, political or credit rating agency reaction; an environment in which significant post-signing economic or market changes are expected or possible; and/or a pre-signing divergence of views between the parties as to the regulatory approval strategy. As indicated by the Anthem-Cigna failed merger, a buyer also may wish to seek greater protections against a target that may become reluctant post-signing and attempt to derail the regulatory approval process.

A more specific efforts provision may be more protective. A merger agreement often provides that the parties will use reasonable best efforts to obtain the regulatory approvals required for closing; and, specifically, that the buyer must use reasonable best efforts, or will take all actions necessary, to make divestitures needed to secure regulatory clearance. Many agreements also provide for specific limitations on the efforts obligation, such as a cap on the divestitures that the buyer would be obligated to make. Often, the limit is tied to a material adverse effect standard, which may be measured against the target, the buyer, or the combined company. As these efforts standards and limitations are often undefined, and materiality may be difficult to establish, a target may obtain added protection from provisions that set forth specific buyer obligations that are viewed as critical, with the parties agreeing in the merger agreement that breach of any of them would be deemed to be material. Depending on the facts and circumstances of the given situation, such obligations could include, for example, that the buyer must:

• Select assets for divestiture based on their value in resolving antitrust issues, rather than on any other objectives the buyer may have;
  
  
• Identify upfront specific assets that must be part of a divestiture package, unless the target or the regulator agrees otherwise-such an approach has the downside of reducing the buyer's leverage with the regulator, as it may provide a regulator with a "roadmap" of problematic assets, but may be useful where it is relatively clear from the outset that certain specific assets will have to be divested to meet antitrust rules or concerns;
  
  
• Include in the package of divested assets specified ancillary assets that would help the divested business operate as a strong competitor-such as, in the Kroger-Albertsons case, the divested stores' trade names, private label brands, and technology;
  
  
• Divest assets at the divestiture cap, if by a certain date the regulator has not accepted a lesser divestiture package;
  
  
• Select as the proposed divestiture purchaser a party who meets specified criteria;
  
  
• Select a specified investment banker to be responsible for running the divestiture process, and provide that both parties must be allowed to participate in substantive meetings with the banker;
  
  
• Agree to have disputes between the parties over compliance with efforts obligations relating to the divestiture package refereed and resolved by independent, experienced antitrust counsel and/or an economist; and/or
  
  
• Perform certain tasks within specified timeframes-such as, deadlines for the buyer and the target to certify substantial compliance with any Second Request, and for the buyer to propose a divestiture package to regulators, commence the process for locating a divestiture buyer, enter into a divestiture agreement, enter into consent decree, and so on.

The agreement could set forth specific consequences for breach of any of these specific obligations. Such consequences could include, for example: shifting to the target some (or primary) control over the regulatory approval process; and/or a right of the target to terminate the deal (which it might want to do if it has lost all hope that the buyer will do what is necessary to obtain the approvals). Also, the agreement could provide that, if certain deadlines during the process are missed, or if the regulatory process drags out beyond certain points, that failure would not constitute a breach, but the buyer would have to make specified payments to the target, or to make such payments into an escrow with the escrowed funds released to the target if regulatory approvals ultimately are not obtained-essentially a "pay-for-delay" construct. Under this type of arrangement, if a buyer thought it could obtain a better outcome by continuing to negotiate with regulators, it could do so, but at a pre-determined price; and the buyer would effectively be pre-paying the RTF, with the benefit to the target that it would not have to litigate after the deal breaks to obtain the RTF. In addition, as an RTF typically is not payable if the target breached its obligations under the merger agreement, a target may seek to negotiate, for this purpose, a higher standard of breach than usual or a breach only of specific obligations.

A target should seek maximum flexibility in the interim operating covenants. A merger agreement often provides that, between signing and closing, the target must act in the ordinary course of business and cannot take certain specified actions, without the buyer's consent. Many agreements provide that the buyer cannot withhold such consent unreasonably. Although the buyer and the target have a unity of interest in ensuring that the target operates effectively pending closing, their views may well diverge with respect to what constitutes effective operation. Also, particularly in the case of a remorseful buyer, the buyer's incentives may be skewed. Thus, the consent provision, even if consent cannot be withheld unreasonably, may not offer the target sufficient flexibility. (See our article, A Postpandemic Framework for Ordinary Course and MAE Provisions in Merger Agreements: Reviewing Recent Market Practice Changes and Addressing Skewed Incentives, published online in The Yale Law Journal.)

A target should consider seeking to obtain the highest possible reverse termination fee. Albertsons alleged that, in negotiating with Kroger, it traded a lower-than-usual RTF in exchange for the highest-possible standard of buyer efforts. Certainly, Albertsons' thinking was that it would prefer that Kroger offer the FTC a significant remedy and obtain the approvals, rather than the deal failing to close and Albertsons receiving a large termination fee. Given the potential for a buyer's breach of its efforts obligations, however, and the possible difficulty of proving willful breach, a target may not always be advantaged by prioritizing the efforts obligation over the termination fee. The decision may depend on the level of antitrust risk, as well as the level of the target's trust in the buyer and its commitment to the deal. The parties should keep in mind that RTFs payable by a buyer are not subject to the same type of fiduciary duty issues as deal protection breakup fees payable by the target. Accordingly, the size of an RTF often exceeds the typical 3-4% range for deal protection termination fees. A Practical Law study of 2023 deals with antitrust-related RTFs reflects that, in 72% of the 39 public and private transactions in this dataset (with a value over $100 million), the RTF was 6% or more of the total merger consideration, with the average for all the deals being 4.8%. For deals valued over $5 billion in this dataset, almost all of them had RTFs above the 2.5% fee in the Kroger-Albertsons deal.

The parties should seek to ensure clarity in their agreement with respect to efforts obligations. First, drafters must pay special attention to the interaction of the various sections of a merger agreement, so that the parties' intentions are properly and clearly reflected. The interaction of multiple efforts standard is a common trouble spot in merger agreements. Second, in some decisions in recent years, the Court of Chancery has indicted that, without further definition, all efforts standards could, in practice, impose a similar obligation-that is, to take all reasonable steps to solve problems and consummate the transaction. Accordingly, where parties agree on a "best efforts" standard, they should consider whether they intend this standard to require even actions that are not "commercially reasonable"- and, if so, they should expressly so provide. Where parties agree on a "hell or high water" commitment, the agreement language should be clear that the parties intend that the buyer is obligated to take any and all actions to resolve antitrust issues, including making any divestitures and agreeing to any conduct restrictions-that is, that they intend to require the highest possible level of efforts that is judicially sustainable.

Antitrust counsel should be consulted early in the process. A critical part of the initial decision whether to pursue a sale or merger transaction involving a competitor is a determination as to the likelihood that antitrust approval can be obtained, and, importantly, whether it can be obtained in a timeframe and on terms that are acceptable to the parties. Also, success in securing antitrust approvals for a deal, and crafting appropriate deal terms relating to antitrust matters, relies to a great extent on planning in the very earliest stages of the deal, guided by antitrust counsel.

A target should consider carefully what the impact of non-approval by regulators would be. If regulatory approvals are not obtained, the target-in addition to having endured ongoing distraction and losing the merger premium-will have been subject, possibly for a lengthy period, to restrictions on its interim operations. In addition, in planning for the deal and the subsequent integration, the target will have shared detailed information with the buyer (who may be a competitor), including with respect to its plans and ideas for the future.

Merger parties should carefully consider the level and type of divestitures likely to be required by regulators-and the buyer should consider whether, realistically, it will find such divestitures to be acceptable. The parties may not wish to provide specifics as to exactly how many or precisely which assets the buyer will be obligated to divest if necessary to obtain antitrust approval-as such information could influence the regulators' view as to what they should require. However, the buyer may want to negotiate for a cap on the divestitures it has to offer and/or the exclusion of certain specified assets; and the target may want to negotiate for a minimum and/or the inclusion of certain specified assets. Generally, the antitrust regulators will be skeptical of large and complex divestiture packages comprised of mix-and-match assets.

Generally, providing a sufficient divestiture package to the antitrust regulators early in the process is a better strategy than proposing an initially weak package and then negotiating it over a lengthy period. In some circumstances, although this is not common, it may even be possible to present to the antitrust regulators at the outset a divestiture package with a divestiture purchaser and appropriate support agreements already lined up. Also, although unusual, there may be circumstances where a buyer, to address a divestiture purchaser's needs for support, could consider providing upfront cash support to the purchaser instead of support agreements that would entail a lengthy period of co-dependence on a competitor.

A buyer could consider a spinoff instead of divestiture. Spinoffs have rarely been used for required antitrust divestitures, but, under appropriate circumstances, a spinoff, with appropriate support from the buyer, may be an effective option for meeting business objectives (indeed, the availability of a viable spinoff alternative should increase the buyer's negotiating leverage with potential third-party purchasers of the to-be-divested assets); and, if properly crafted and presented, a spinoff may be acceptable to the regulatory agencies. A spinoff could offer the advantages that a suitable purchaser would not have to be found and that the arrangements would be self-executing (i.e., the company would determine the arrangements without having to negotiate with a third party). Also, it should be easier to provide to a spinco, rather than to a third- party buyer of assets, the agreements and other support that would ensure that the spinco would be a strong competitor. Most importantly, all of the value delivered to the spinco would be captured by the merger party's stockholders (rather than by a third party, in what is often the equivalent of a "fire sale" due to the pressure to divest to obtain the approvals).

A buyer could consider signing an agreement to sell the overlapping assets prior to the Hart-Scott-Rodino ("HSR") filing, and submit the HSR filing only for the acquisition of assets that would remain after the divestiture. With this approach, the buyer can focus the antitrust agencies (and potentially a court) on the as-fixed transaction upfront, rather than as a potential remedy to an otherwise anticompetitive transaction. In contrast, in Kroger-Albertsons, the HSR filings submitted by the parties were for Kroger's acquisition of all of Albertsons, and the FTC was easily able to show in their prima facie case that the transaction as filed was anticompetitive across hundreds of geographies. Only at the rebuttal stage did the defendants have the opportunity to show how the proposed divestiture would mitigate the anticompetitive harms.

A buyer should not ignore the target's input if there is a cooperation obligation. If the parties' agreement, as would be typical, grants the buyer control over crafting and implementing the regulatory approval strategy but requires the buyer to cooperate or consult with the target, the buyer does not have to follow the target's advice or suggestions, but should not simply ignore the target. A record should be maintained of the consultations or conversations with the target and, possibly, the reasons for disagreeing with the target's advice.

Antitrust law and policy is in flux. Notably, the federal court enjoining the Kroger-Albertsons merger endorsed the FTC's embrace of important new components of the 2023 Merger Guidelines that have been controversial-including narrower definition of relevant markets; consideration of labor markets as a relevant antitrust market; and low levels of concentration (as low as 30%) as establishing a presumption that a transaction is anticompetitive. We expect that the antitrust agencies, under new leadership in the Trump administration, are likely to revert to a more traditional approach to mergers than has been the case under the Biden administration, with less focus on novel theories of harm such as the impact on labor, and possibly revision or withdrawal in whole or in part of the 2023 Merger Guidelines.

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